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Tuesday, November 15, 2011

The stock market’s big lie revealed

BOSTON (MarketWatch) — Millions of people still put their faith in the stock market.

Even after the events of the past dozen years people still hold trillions of dollars in equities and equity mutual funds in their personal accounts and 401(k) plans.

They believe, as they’ve repeatedly been told, that “free” and public markets offer the best long-term deal for themselves and for the economy as a whole. They are told that the stock market is “efficient,” always setting the “right” prices for securities and always squeezing the best performance out of the economy. Our country, including our government, relies to a remarkable degree on the idea that if you let stocks trade publicly they will “find their level” and we will all gain. Even the Supreme Court has cited the verdict of the stock market in support of decisions.

But is that right? Or is it all a big lie?

Into my hands last week fell a confidential document that makes me wonder, once again.

It is the latest analysis of the private-equity industry by Cambridge Associates, a highly regarded investment advisory firm. Private-equity firms jealously guard their performance figures from the public and, to a lesser extent, from competitors. The person who gave me the document begged me not to disclose him as a source.

Why is the document so explosive?

Because it shows what a terrible deal the public stock markets have really been for ordinary investors. And it does that by showing how much better investors have done in the hands of small groups of private-equity managers.